Philippine office market could take a hit over tax proposal that could hurt outsourcing and Chinese online gaming firms

17-Jan-2019 Intellasia | South China Morning Post | 6:00 AM Print This Post

Demand for office space in the Philippines from two big job creators business process outsourcing and Chinese online gaming could take a hit if a proposed tax change goes into effect and the US-China trade war isn’t resolved.

The Philippine office property market has posted growth for more than a decade and has been mainly supported by the BPO sector a major generator of jobs and revenue in the country and, more recently, the online gaming firms from China.

But property consultancy JLL Philippines said the country’s office property market could be undermined if such employers face a different tax structure.

The Philippines is considering changing present tax incentives that grant export-oriented firms including outsourcing companies tax holidays of up to eight years, and beyond that, a cap of 5 per cent tax.

Under a proposed tax overhaul, corporate income tax would gradually be reduced from 30 per cent to 25 per cent. However, a tax holiday would be granted based on performance, which might disqualify a number of BPO firms, while the tax cap would be raised to 15 per cent on net taxable income.

“This comes at a time when Malaysia and Indonesia are heavily subsidising their BPO industries, so locators would choose them instead,” said Christophe Vicic, JLL Philippines country head.

Vicic said the proposed changes would make it expensive for new BPO players to set up shop in the Philippines and for small players to expand.

The tax push is to get rid of redundancies and other flaws that led to lost revenue amounting to 178 billion pesos (US$3.4 billion) in 2016, proponents say.

The overhaul was proposed in 2017, and the first part was passed and took effect last year. The second part, which includes the tax holiday and revised net taxable income cap, has been approved by the House of Representatives and is awaiting Senate action. The powerful chair of the Senate committee overseeing taxes opposes the new tax proposals, but the president, Rodrigo Duterte, supports it. Its fate is unclear.

The BPO industry was forecast to have 1.8 million workers and generate $40 billion in revenue for the country by end of 2022, according to industry union Information Technology and Business Process Association of the Philippines. If the second tax-revision round goes through, that could change, it said.

Meanwhile, if the US-China trade war continues, it could also dent mainland Chinese appetite for online gaming. The Chinese economy has been slowing, partly due to the trade war, and that undermines disposable incomes.

Chinese gaming firms took up 30 per cent of the 775,000 square metres of office space built in the Philippines last year. In 2017, $184 million of the Philippines’ $2.92 billion of gambling revenue came from online betting, which was a 14 per cent increase from 2016.

But Vicic said he remained bullish that the Chinese online gaming industry would continue to grow in the foreseeable future.

“The Chinese economy remains strong and the Chinese government is doing a lot to keep their growth pace,” he said.

Despite the risks, JLL said the office property market will continue to post growth this year, calling it “a landlord favourable market” as supply, demand, rent, and capital values are forecast to remain positive.

“JLL believes that the office property sector is still going to grow this year, supported by the BPOs, and online gaming firms,” said Vicic.

Another property consultancy, Colliers, said that while Jakarta and Kuala Lumpur are pursuing initiatives to make their BPO industry more attractive, the Philippines remains an attractive investment site.

“In the short term, there is no immediate threat. The Philippines still has an edge in terms of English language proficiency coupled with competitive wages and economic zones incentives,” said Dom Fredrick Andaya, Colliers International’s director of office services in the Philippines.

Andaya said BPO companies ramped up their office space take-up from 25 per cent in 2017 to 42 per cent in 2018.

“Major outsourcing companies are maintaining status quo. In the meantime, the pressure for end users to outsource is building up, so they continuously expanded in 2018. These companies have probably priced in the potential impact of (the proposed tax change),” he said.


Category: Philippines

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